Professor’s Comments February 27, 2020

Posted by OMS  at February 27th, 2020

The markets were mixed yesterday. The Dow finished with a loss of 124 points, closing at 26,960.  The NASDAQ was up 15 points while the SPX was down 12 points. Volume on the NYSE was heavy, coming in at 136 percent of its 10-day average.  There were 28 new highs and 352 new lows.

Yesterday’s early rise was likely wave 4 up of a five wave sequence for Wave 1 down.  As I mentioned in yesterday’s early comments, I had been looking for the Dow to rally to about the 27,400+ level.  When the Dow failed to push much beyond this level, the odds were high that wave 4 up was complete and wave 5 down was about to start.  This was the reason the Model sold its long positions in DDM and inverse gold. The counter trend trade was complete.

Then with the Dow down about 150 points, the Model re-established a new ‘trial’ position in DDM thinking wave 5 of Wave 1 down was nearing completion.  In retrospect, the move might have been a bit early.  That’s because while my primary scenario had Wave 1 down completing just under the 27,000 level, there is another scenario that suggests prices could fall significantly lower.

The reason I say this is because yesterday’s brief early rise …that’s the key, could have been wave 2 up within a 5 wave sequence for wave 3 down.  If this the case, the Dow could easily fall several thousand points from current levels.  This is NOT my primary scenario, but because of the magnitude of the potential potential decline, I fell it MUST be mentioned. The A-D oscillator came in with another EXTREME overbought reading of -298 least night, close to the previous day’s reading of -286.  That’s only a difference of 12 points, or very close to my 10 point criteria for a Big Move.  BTW, we need to pay attention to this because readings below -250 are usually seen when the market is crashing.  So, unless the market begins to stabilize today, the Model will sell its ‘trial’ position in DDMs and move to the sidelines.

Here’s why:  If the Dow is about to crash, wave 3 down could just be getting started.  It has the potential to fall to the 26,00 level or lower.  Wave 3s are usually 1.67 times wave one down but can be up to 2.67 times in EXTREME cases.  So, with a flashing RED signal from the A-D oscillator, we need to pay attention.  Like I said, this is NOT my primary scenario, but if the market fails to stabilize near current level, the Model will need to act on its DDMs. 

BTW, the Dow’s 200-day moving average DID NOT provide any support for prices during the past few days.  Normally the 200 located near the 27,460 level should have held.  But prices went through this level like a hot knife goes through butter.  This is another very unusual event.  Its another reason for caution. 

The market timing indicators remain Negative.  The DMIs on the Dow and NASDAQ-100 (QQQ) are also Negative as are the Dean’s List and The Tide.

The Sector Ratio fell to 2-22 Negative after yesterday’s session.  This is a strong indication that the entire market is moving lower.  The only two Strong Sectors were Telecoms and Computers.  The Weak Sector List was led by Autos, Energy, Service, Leisure and Transportation.  To give you an idea about how weak the Lists are at this point, only the Telecoms has a RS rating of better than a positive 1.  Computers had an RS rating of zero.  The top 12 sectors on the Weak List has RS ratings of -4 or lower.  All the remaining sectors on the Weak List has RS ratings of -1 or lower.  So, the Sector List is telling me the market is EXTREMELY weak.

Model Portfolio:  The Model sold its shares of DDM and inverse gold during yesterday’s early bounce for a nice profit.  It then repurchased 400 shares of DDM later in the day at 49.28.  So, now the Model is holding 400 shares of DDM and a lot of cash.  But like I said, unless the Dow shows signs of stabilizing, the DDMs will be dumped.  There’s way too much risk in this market now to be holding any positions of size.

BTW, after closing yesterday’s transactions in DDMs and inverse gold, the Model Portfolio finished its first year with a gain of 30.36 percent. This compares to a gain of 11.5 percent for the un-managed SPX. Students should note that about 80-85 percent of investment managers and mutual funds DO NOT beat the SPX.

Also, the Model managed to beat the S&P by a ratio of almost 3:1 at a significantly lower level of risk. The sigma for the Model was 9.29 vs 18.47 for the SPX. Sharps Ratio for the Model was 0.33 vs.0.03 for the SPX.

Regression analysis for the Model against known benchmarks shows:

Treynor Ratio: -11.32

Alpha: 0.01

Beta: 0.27

R-squared: 0.32.

If you use an investment advisor to manage your portfolio, you might want to get these numbers for your portfolio and see how they compare. I’m extremely proud of the Model’s performance as the numbers show a nice yearly gain achieved at an EXTREMELY low level of risk. Managing risk is always the #1 thing to consider when you analyze any portfolio. Higher gains can always be achieved, but you MUST ask at what risk level. The Model’s approach has always been to try to obtain gains that outperform the SPX at a lower risk level. The numbers show the Model was successful at doing this in its first year of existence.

I’m really looking forward to see how the Model performs next year.

h

The Model Portfolio is being shown for educational purposed only.  The Buy/Sell actions in the Model Portfolio are made based on technical indicators that can and do change frequently and should NOT be considered as recommendations for trading an actual portfolio.  Any gain or loss in the Model Portfolio should not be used to predict future performance of the Model.

Market Signals for

02-27-2020

Not sure of the terminology we use? Check out these articles

The Hockey Stick Pattern
The Creation of Waves and Trends
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All of the commentary expressed in this site and any attachments are opinions of the author, subject to change, and provided for educational purposes only. Nothing in this commentary or any attachments should be considered as trading advice. Trading any financial instrument is RISKY and may result in loss of capital including loss of principal. Past performance is not indicative of future results. Always understand the RISK before you trade.